In defence of high-frequency trading

Many blame the “flash crash” of 2010 — when the Dow Jones dropped 9% within minutes — on high frequency trading (HFT), claiming it created instability.

But sudden downturns in the stock market are not exclusive to HFT, and taxes or regulations to reduce the trading are a solution looking for a problem, according to new research by National Center for Policy Analysis senior fellow Pam Villarreal.

When Canada imposed a fee on submissions and cancellations in 2012, high frequency traders reduced their order submissions by 30%. This had negative effects on retail and institutional investors in a less efficient and competitive market, the study says.

As with any other industry, high frequency traders compete with each other to fill orders. As a result of this competition, U.S. industry HFT profits have actually fallen during the past five years, according to the research.

“Intense market competition is already resulting in lower profits for high frequency traders. This will cause many to exit the market,” says Villarreal, in a statement. “Regulations or taxes are simply unnecessary.”

Also read:

SEC issues highest-ever fine for violating net capital rule

Slowing down high-frequency traders for fairer markets

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.